Spain Has Solid Bond Auction, Eurocrats Nervously Upbeat

Spain’s Treasury sold EUR3.372 billion in two long-dated government bonds Wednesday, in a well received auction albeit at higher yields, easing fears that speculation of a Greek debt restructuring will damage Spain’s ability to borrow in the bond market.

“Overall we think that the question of ‘Who’s next?’ belongs to the past and the next key question relates to the countries under European Union/International Monetary Fund mechanisms and ‘How do they come out?’,” said Ioannis Sokos, a strategist at BNP Paribas in London.

Spain offered EUR2.5 billion to EUR3.5 billion of the 5.50% April 2021 and 4.80% January 2024 bonds.

The average yield on the closely-watched 10-year bond rose to 5.472% from 5.162% at the previous auction March 17, and it rose to 5.667% from 4.248% at the previous auction in November 2009 for the January 2024 bonds. Both bonds were sold in more than two-fold coverage–at bid-to-cover ratios of 2.10 and 2.27, respectively, both higher than previously.

The solid demand for the bonds is reassuring after Spain’s weak sale of Treasury bills Monday, with rising yields and low demand.

“All in all, relatively reassuring results providing no indication Spain’s decoupling from the periphery is under immediate threat,” said Richard McGuire, senior fixed income strategist at Rabobank.

Yields on Spanish bonds had risen steadily from the middle of last week after German Finance Minister Wolfgang Schaeuble appeared to open the door to a Greek debt restructuring, prompting widespread selling of all non-core euro-zone sovereign bonds.

The success of the euro-skeptic True Finns party in Sunday’s Finnish elections also raised fears that the commitment by the remaining triple-A euro-zone countries to support the currency area’s weaker peripheral members will wane.

But investors began buying Spanish bonds in the secondary market Tuesday, attracted by the cheaper prices after the sell-off.

This cheapening, along with the relatively low offer size, and inflows of coupon and redemption payments due next week, were seen as supportive factors for the solid bids at Wednesday’s auction.

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